Price mechanism
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services, principally by the price elasticity of demand. A price mechanism affects both buyer and seller who negotiate prices. A price mechanism, part of a market system, comprises various ways to match up buyers and sellers.
The price mechanism is an economic model where price plays a key role in directing the activities of producers, consumers, and resource suppliers. An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in trade, the purchaser will announce a price he is willing to pay (the bid price) and the seller will announce a price he is willing to accept (the ask price).
The primary advantage of such a method is that conditions are laid out in advance, and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.[1]
Working of the price mechanism
Under a price mechanism, if demand increases, prices will rise, causing a movement along the
For example: the oil crisis of the 1970s drove oil prices dramatically upwards, which in turn caused several countries to begin producing oil domestically.
A price mechanism affects every economic situation in the long term. Price Mechanism plays a vital role in determining prices in a capitalist economy. An example of the effects of a price mechanism, in the long run, involves fuel for cars. If fuel becomes more expensive, then the demand for fuel would not decrease fast but eventually, companies will start to produce alternatives such as biodiesel fuel and electrical cars.[5] A price mechanism is a system by which the allocation of resources and distribution of goods and services are made on the basis of relative market price. There are two important elements of price mechanism – 1. PRICES - prices are essence of price mechanism. Price mechanism works through prices in a free enterprise economy, where all goods and services carry price tags with them. A whole set of prices prevail in such an economy. Goods and services are available at a price because it involves cost in producing these goods and services. Consumers have to pay some prices if they want to buy some goods like food, clothes, etc. Producers are willing to sell goods and services only if they get the appropriate price. 2. MARKET - forces of demand and supply operate within the framework of market. Market constitute an integral part of the price mechanism A market means a system or a set-up in which the buyers and sellers of the commodity are able to interact and communicate with each other and strike a deal, i.e., price and the quantity to be bought and sold.
Auctions
An auction is a price mechanism where bidders can make competing offers for a good. The minimum bid may or may not be set by the seller, who may choose to predetermine a minimum asking price. The highest bidder would be awarded the transaction.
Other applications
If the terms "pay" and "sell" are understood very generally, then, a very broad range of applications and different
Though there are many concerns about liquidating any given transaction, even in a conventional
In most applications of such methods, however, the
So price mechanism is a technique by which inflation is controlled. The price can only be increased if the supply is less and has more demand for the same.
Less controversial applications of bid and ask matching include:
- industrial process control[citation needed]
- various applications in social networks (including dating above)
- calculating interest in court judgments or homestead credit
- determining which of several assets in a divorce are most prized by each party, and accordingly, who should receive what for maximum amiability and minimum capital asset sale and lifestyle disruption
See also
References
- ^ A seminal article on the firm in relation to transaction costs is R. H. Coase (1937), "The Nature of the Firm," Economica 4(16), pp. 386–405, which has with some 41 uses of "price mechanism" in it (via cntrl-F: price mechanism), illustrating contexts for its usage.
- ^ a b Samuelson, P. Anthony., Samuelson, W. (1980). Economics. 11th ed. / New York: McGraw-Hill. p. 49
- ^ Callan, S.J & Thomas, J.M. (2007). 'Modelling the Market Process: A Review of the Basics', Chapter 2 in Environmental Economics and Management: Theory, Politics and Applications, 4th ed., Thompson Southwestern, Mason, OH, USA
- ^ Pettinger, T. (n.d.). Price Mechanism in the Long Term. or price mechanism is the mechanism in which price plays a key role in directing the activities of producers, consumers and resource suppliers. In Economics Help. Retrieved April 10, 2011, from http://www.economicshelp.org/microessays/equilibrium/price-mechanism-long-term.html
- ^ Pettinger, T. (n.d.). Price Mechanism in the Long Term. In Economics Help. Retrieved April 10, 2011, from http://www.economicshelp.org/microessays/equilibrium/price-mechanism-long-term.html